Don’t look a gift horse in the mouth

The DOL's proposal on using ESG investments in retirement plans could remind advocates of sustainable finance of the work still to be done

The Trump administration positions itself as a deregulatory force to be reckoned with, and it’s not been for lack of trying, either. By the government’s own admission. it has authorized seven deregulatory actions for every new regulation it enacts. While the rationale behind each of these moves can certainly differ, the Trump administration consistently likens them to “gifts” for target industries.

But the administration’s intended beneficiaries don’t always feel the same way. Scores of deregulatory moves have been met with clear condemnation by industry voices making clear their preference for regulatory stability and certainty as opposed to unpredictable and likely impermanent executive governance.

In June, the Labor Department unveiled plans to “update and clarify” its investment duties regulation under the Employee Retirement Income Security Act. These proposed amendments are, ostensibly, designed to restrict private pension plan fiduciaries’ consideration of environmental, social and governance factors when investing on behalf of their plan participants and beneficiaries.

Affected fund managers have been unequivocal in their response — should the proposed changes go into effect, we can expect to see the performance of retirement plans suffer as a result, and with them, the capital that would otherwise flow to climate change-mitigating investment options.

It’s no wonder nobody asked for this. In the U.S., net quarterly inflows into open-end and exchange-traded sustainable funds reached a record $10.5 billion in the first quarter, a nearly 50% increase over the record set in the preceding quarter according to Morningstar.

These heights, of course, were reached despite the COVID-precipitated market rout. A recent analysis from S&P Global Market Intelligence found that of 17 ESG-weighted exchange-traded and mutual funds tracked, 14 fared better than the wider market. In Europe, where the majority of the world’s ESG funds are domiciled, Morningstar found more than half of sustainable funds consistently outperformed non-ESG funds over the last decade.

It’s no surprise, then, that when US SIF queried 141 money managers on their reasons for incorporating ESG criteria into their respective investment processes, 75% pointed to their seeking higher-yield, lower-risk investments. A similar, more recent survey — conducted by the government’s own accountability watchdog, no less — found that 12 of 14 institutional investors routinely seek more information regarding a listed company’s ESG strategy when deciding whether to invest.

Another aspect of the proposed ERISA amendments that we ought to consider is the effect it will have upon ESG-leaning companies, whose “candidacy” for investment the new rules effectively restrict. This is particularly concerning for the clean energy industry, its investors and advocates who understand just how crucial pensions and other institutional investors are to closing the global renewable energy financing gap and, in turn, driving the transition toward a low-carbon economy.

For fiduciaries, the Labor Department’s revised ERISA interpretation creates new and expensive headaches. And for the clean energy industry, the revision of pension managers’ legal obligations amounts to little more than an ill-conceived attempt to support fossil fuels and other typically non-ESG-aligned sectors.

The question that remains, then, is whom this proposed change is meant to advantage? Whatever the answer, it’s best we don’t look a gift horse in the mouth.

Indeed, while the explicit impetus behind this is categorically absurd, the implicit purpose that we can glean offers some cause for reflection. Specifically, it is the process through which fiduciaries will be required to prove their sustainable investments are economically indistinguishable from similar non-ESG investments that underscores a perennial challenge in sustainable investing. And that is the notoriously insufficient identification, collection, standardization and inter-institutional sharing of relevant ESG data by investors, companies and regulatory bodies.

Various institutions have undertaken efforts to combat this, though. In just the last few months, notable initiatives have ranged from the EU’s adoption of its “common language” for stakeholders to disclose the environmental sustainability of their activities, to the recent launch by a group of international pension funds of their highly anticipated AI-powered green investing tool, which tracks companies’ adherence to the UN’s Sustainable Development Goals. And in the few short weeks since the DOL made public its proposal, four of America’s largest banks signed on to the Center for Climate Aligned Finance, and Morgan Stanley became the first U.S.-based global bank to join the Partnership for Carbon Accounting Financials, a “financed emissions” reporting project.

Perhaps the proposed ERISA update is a gift in that it reminds observers in sustainable finance of the work we have cut out for us. However, beyond stressing the advantages of better data, the proposed ERISA amendment is a recklessly conceived and hastily deployed obstacle in renewable energy’s path. Thankfully, those of us in the know can confidently say that, in the end, it will take more than this to derail the green transition’s momentum.

Claire Sharp is managing director for the Americas at Kaiserwetter, an energy asset management company.